As you look to grow your small business, you may come to the point where a new vehicle becomes a more appealing idea. After all, who wouldn’t want a new car that comes with some tax deductions? But is this really a good idea if you’re still growing? What kind of deductions do business vehicles really come with? Today, we’re going to talk about how you can handle these questions by going over how to use your car for both business and personal purposes.
Purchasing a Company Vehicle
Many small business owners choose to buy a vehicle with their personal funds or with a personal loan, and then use the vehicle for business purposes. This is probably the easiest route to choose, since purchasing a vehicle through a company can be a bit more involved for a small business—especially a new business that doesn’t have established credit. However, even if the vehicle is in your name, you can still drive it for business and get some deductions on your personal tax return. And then, if you ever decide to close or sell your business, you don’t have to jump through any hoops to keep the vehicle, since it’s already in your name.
Recording Your Miles
As you can imagine, buying a car that you will use for company purposes, is a large investment, so you will want to make the most of your purchase. In order to do this, you will want to take advantage of the available tax deductions.
The most important thing you’ll need to do is keep a record of the miles that were driven for company purposes. To do this, you could manually track how far you are driving using old-fashioned pen and paper, or you could make use of a mile tracking app such as MileIQ or driversnote. The purpose behind mile tracking is to be able to report those business miles during tax time. You can deduct a certain standard rate per mile (which changes year-to-year) on your tax return to bring down your taxable income. Claiming the standard mileage rate is the easiest way to get a tax deduction for your vehicle that you drive for work.
Other Vehicle Expenses
If you don’t want to claim the standard milage rate, but would rather deduct your actual vehicle expenses, such as gas, repairs and maintenance, registration fees, and insurance premiums, that is another option. When you choose this route, you need to keep all of your receipts for your vehicle-related purchases.
It should be noted, however, that you cannot deduct the full amount of these expenses if you use the vehicle for both personal and business driving. You are only able to deduct the percentage of those expenses that corresponds to the percentage of miles you drove in the year for business purposes. If, for example, you drove the vehicle 10,000 miles in a year, but only 3,000 of those miles were driven for business, you can only deduct 30% of your vehicle costs on your taxes.
When you use this method to claim a deduction, it should be noted that you’ll need to track your mileage and carefully save all of your receipts. This is why most people choose to simply use the standard mileage deduction on their tax returns. It’s much simpler, and may actually yield a larger deduction.
As far as insurance goes, you may need to acquire a hired and non-owned auto insurance (HNOA) policy. This type of insurance is used specifically when your company is not the owner of the car that you are using for work purposes. HNOA insurance covers your business from lawsuits should you or one of your employees get into an accident with the car while using it for business. It does not, however, cover any damage to the non-company vehicle, so you may want to consider additional coverage for the vehicle to protect yourself from having to pay for those damages out of pocket.
Choosing to purchase a new vehicle is a huge decision, so you shouldn’t make it on a whim, but the tax advantage can certainly make the decision a little easier.
For a more comprehensive guide on how to incorporate a vehicle into your growing company, take a look at this e-book: The Small Business Owner’s Guide to Company Cars: Tips on Buying, Leasing, Tax Deductions, Mileage, and Employee Use . It offers small business owners a wealth of information to take into consideration before taking the leap and purchasing a company vehicle.
Remember that if you do decide to use your own car for company purposes, you need to have the proper insurance and you’ll need to track your mileage. This will keep your personal use and business use separate and ensure optimal use of your new asset!